Consolidated-Tomoka Land Company (CTO) Q3 2018 Earnings Conference Call Transcript

Consolidated-Tomoka Land Company (AMEX:CTO)
Q3 2018 Earnings Conference Call
Oct. 18, 2018 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Consolidated-Tomoka third-quarter 2018 earnings conference call. [Operator instructions] Please note that this event is being recorded. I would now like to turn the conference over to John Albright, president and CEO. Please go ahead, sir.

John Albright -- President and Chief Executive Officer

Thank you, operator. Good morning, and welcome to today's conference call to review the operating results of Consolidated-Tomoka Land Company for the quarter ended September 30, 2018. My name is John Albright, president and CEO of the company. On the call with me is Mark Patten, our chief financial officer, and Dan Smith, our general counsel and corporate secretary.

First, I'll turn it over to Mark to provide you with the customary disclosures regarding our comments on this call today and a few points regarding the format of our call.

Mark Patten -- Chief Financial Officer

Thanks, John. Good morning, everyone. During our call today, we may make certain statements that may be considered to be forward-looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we may not release revisions to these forward-looking statements to reflect changes after the statements were made.

Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's filings with the SEC and in our earnings release issued last night. Also, we filed our Q3 2018 investor presentation last night, which is now available on our website. Our investor presentation provides additional information you may find useful and that we may be referencing during this call. And with that, I'll turn it back over to John.

John Albright -- President and Chief Executive Officer

At this time, we'll open it up for questions. Operator?

Questions and Answers:

Operator

[Operator instructions] And our first question comes from Craig Kucera from B. R -- B. Riley FBR. Please go ahead.

Craig Kucera -- B. Riley FBR -- Analyst

Hi. Good morning, guys.

John Albright -- President and Chief Executive Officer

Good morning.

Craig Kucera -- B. Riley FBR -- Analyst

I wanted to go through your -- some of the strategic initiatives that you outlined in your slide deck and in the press release. You're thinking about generating maybe upwards of $125 million of proceeds from multitenant sales next year, and even possibly this quarter because they are at market, which makes sense to be more of a pure play. It looks like the expected disposition yields are about 5.75% to maybe 6.5%. As you look at the pipeline of sort of potential acquisitions, do you anticipate that to be effectively neutral? Or is there potential for accretion there? And are you thinking about any skew toward retail or office or just the continued mix?

John Albright -- President and Chief Executive Officer

Yes. I think to start at the latter part, probably be a continued mix, but if we had the opportunity, certainly skewing toward the retail would be the desire. But as you can see from our acquisitions, sometimes, we're finding pretty compelling yield on the office side. But we'll be -- basically, on the recycle of the multitenanted properties, we're going to take our time, make sure we try to get premium pricing and obviously fit some of that exchange into the two acquisitions we just made.

But obviously, we feel like we'll be able to make accretive yields based on where these properties should trade. So the idea would be, obviously, to have accretive transactions from the recycling.

Craig Kucera -- B. Riley FBR -- Analyst

Got it. And it looks like there's two other multitenant assets that are relatively small, at least from an NOI contribution perspective, in Brandon and Dallas. Are those -- are you ultimately looking to potentially sell those down the road or are those likely long-term holds?

John Albright -- President and Chief Executive Officer

Yeah, eventually. But obviously, we're taking care of the larger assets. But eventually, we'll definitely get to those. But as you mentioned, they're fairly small.

Craig Kucera -- B. Riley FBR -- Analyst

Right. You've got a goal out here now to really get you pretty much to 85% income properties by the end of '19, and really not have too much land left to sell. Can you update us on where that puts you in consideration for potentially converting to a REIT from the perspective of timing?

John Albright -- President and Chief Executive Officer

Yes. So I think still, we're in that kind of timing of thinking about it, having the board consider it. And obviously, it needs to go to shareholders. But it looks like 1/1/2020 would be a reasonable target for us.

Craig Kucera -- B. Riley FBR -- Analyst

Got it. And Mark, I guess, you go to the balance sheet, about half your debt currently is floating. When you think about selling a lot of this land and sort of recycling capital to what the company looks like, maybe at that point in 2020, how does the balance sheet look? Do you continue to carry that amount to floating rate debt? Or kind of -- can you give us some color about how you're thinking the balance sheet looks like down the road?

Mark Patten -- Chief Financial Officer

Yes. Thanks, Craig. The way we've kind of done it in the past, which is how I think we'd probably approach in the future even as we get to close to 2020, is the credit facility is kind of our functional capitalization of transactions in front of the reverse transactions of selling land. So I think that's probably how we'll try and continue to do that.

So whether we look at some fixed-rate debt just simply for different reasons other than how we fund our acquisitions. But I think right now, that's how we see it happening.

Craig Kucera -- B. Riley FBR -- Analyst

Got it. Just wanted to get a little bit more color on the acquisitions you guys recently completed here and in fourth quarter. With the Fidelity acquisition in Albuquerque, what are the annual escalators there?

John Albright -- President and Chief Executive Officer

Yes. So that one, we -- we're happy to have an annual escalation on that. So that's kind of not very regular that you would have an office building with annual escalations, but this one does. So we're pretty thrilled with that.

Craig Kucera -- B. Riley FBR -- Analyst

And is the -- you guys put out that the acquisition cap rate was 7.75%. Is that a cash, or is that a gap over the 10-year remaining lease term?

John Albright -- President and Chief Executive Officer

Well, that's the cash investment cap rate.

Craig Kucera -- B. Riley FBR -- Analyst

Got it. And the escalators at the Jacksonville ground leases, I think there's a note that it generally increases every five years. Is that -- given that it was built in 2017, should we assume that we won't see anything until 2022? Or is it -- is that a fair assumption?

John Albright -- President and Chief Executive Officer

Well, they're staggered, obviously, on when the lease commences -- happen. But these are fairly new, so you can -- safe to assume that it's going to be more toward the five years. There -- we do have one that's annual, but, yes, I would say, five years out is when you're going to see most of the activity.

Craig Kucera -- B. Riley FBR -- Analyst

OK. Just a few more for me, and I'll hop off and get in the queue. You closed with the -- with these two acquisitions in Jacksonville and Albuquerque. I think you closed about $103 million year to date, which puts you above the midpoint of your guidance.

Are you actively working on other transactions that could potentially close here in the fourth quarter? Or I know your guidance is up to $120 million, but do you feel, given that you're already above the midpoint here early in fourth quarter, do you have a sense of sort of what the rest of the year looks like?

John Albright -- President and Chief Executive Officer

Yes. We're still active in looking at opportunities. But it's safe to say, we're not reaching for anything. If there's something out that really fits and we like it a lot and it's accretive to the portfolio as far as quality and so forth and yield, we would certainly transact.

Craig Kucera -- B. Riley FBR -- Analyst

OK. O'Connor elected to terminate its contract that the industrial park. Can you give us some additional color there on what happened? And are you seeing continued interest in that parcel from other potential parties?

John Albright -- President and Chief Executive Officer

Yes. So O'Connor, it definitely -- I will say this in general, that there's not going to be a buyer for that 850 acres without having some sort of insight into tenant activity, whether it's in a tenant in hand or our knowing that something could happen there as far a the user. So they weren't able to find a tenant and their time was kind of running out for them. They needed-- they just didn't want to spend more money without seeing something concrete from tenant activity.

So we do have another group that's interested to put it under contract, but they would more or less want to run the same kind of program, look out for tenants. And we're right now talking to advisors on the leasing side about strategies to optimize that parcel, so it's such a large parcel. So we're actively thinking about what -- how's the best way to attack it. And I'm sure here, won't be very long until we come up with a strategy that we'll pursue.

Craig Kucera -- B. Riley FBR -- Analyst

OK. It's not a big part of your business, but the golf course, I think you guys are hopeful, putting in a new operator, that operations could improve. And I guess what-- what happened, I guess, that triggered the impairment charge this quarter?

John Albright -- President and Chief Executive Officer

Well, it was a couple of things. And appreciate you bringing that up. So when we brought in Arcis a year ago, December, we were really hopeful that they could take it to the next level in terms of improvement. Just haven't been able to achieve that yet.

And so when we basically looked at the second half of the year, what we really decided was we should look at different opportunities or strategic alternatives for that asset. And once we did that, we actually engaged some folks to help us on the valuation side of the business, and then also started to engage with interested parties, and that kind of give us the triggering event.

Craig Kucera -- B. Riley FBR -- Analyst

OK. And one more for me. Just on the dividend, assuming you did complete a reconversion, do you have a sense, from the perspective of a payout ratio, of what -- maybe what kind of payout ratio that you think the board was contemplating on a recurring FFO or AFFO basis once you've completed the vast majority of these land sales and capital recycling in 2019?

John Albright -- President and Chief Executive Officer

Yes. I don't think -- we're not really there yet. We haven't really crossed that bridge, so we're focused on getting more land sales done and get us in that position. And obviously have more color for you later next year.

Craig Kucera -- B. Riley FBR -- Analyst

All right. Thanks, guys. I appreciate it.

John Albright -- President and Chief Executive Officer

Appreciate it. Thanks.

Mark Patten -- Chief Financial Officer

Thanks, Craig.

Operator

And our next question comes from Liz Cohernour from Wintergreen. Please go ahead.

Elizabeth Cohernour -- Wintergreen Advisers -- Analyst

Hi, guys. I actually have two questions here that are both follow-ups on the ones that have just been asked. With respect to a REIT conversion, what considerations are you giving to, and how significant is it for the company to look at the tax changes that have been implemented over the last year?

John Albright -- President and Chief Executive Officer

Well, I guess, I'd say that it's certainly a data point for us to consider. I mean, if you drop the corporate rate down to basically 25% -- 21% for the corporate, but the mix is 25%, that's certainly relevant. But when you consider our land basis, it's still -- 21% of that gain is still a pretty big number.

Elizabeth Cohernour -- Wintergreen Advisers -- Analyst

Right. And if you were to be acquired by somebody who could match up their tax needs and yours, those -- a lot of those issues would be going away. A second question goes to the golf operations. At that time of the acquisition in 2017, CTO acquired the land, as I recalled, something like $1.5 million, plus a donation of over 14 acres of land, to the City of Daytona, which is next to the land, next to the municipal stadium.

And at that time, the land was valued at somewhere between $250,000 or $300,000 an acre. The press reported comments from the city that they were surprised anybody was willing to be paying that much. And the -- at 26 December of '16, you valued the golf at the little over $3.5 million. March of '17, after the purchase, it was $5.8 million.

June of '18, it was $5.7 million. And now you've got the writedown of $1.1 million, which gets you to $3.1 million, which is sort of a big drop between $5.7 million and $3.1 million. It looks to me like more than a million bucks. But this whole thing looks like it was basically misdirected or a gift to the city.

John Albright -- President and Chief Executive Officer

So obviously, whoever decided in the company's history to build this golf project clearly wasn't -- in the company's history, the best idea in hindsight, but that's hindsight. So when we bought the land lease from the city, the golf operation was unsellable. No one would buy it because of the land lease. So the purchase of the land lease was necessary to have a property or operation that you could sell.

So that's the -- was the necessary step to make to put us in position to sell the golf operations.

Mark Patten -- Chief Financial Officer

The other thing I'd say, Liz, is that that payment was basically buying out a lease where we were going to have to pay it over the next eight years. So it's not as if that was an incremental incurrence of cost, because we would have been paying that lease payment for the next seven, eight years.

Elizabeth Cohernour -- Wintergreen Advisers -- Analyst

Right. And that lease was, again, a management-negotiated lease.

Mark Patten -- Chief Financial Officer

The prior management, that's right.

Elizabeth Cohernour -- Wintergreen Advisers -- Analyst

Same shareholders, prior management, yes?

Mark Patten -- Chief Financial Officer

Yes.

Elizabeth Cohernour -- Wintergreen Advisers -- Analyst

OK. And just as a point of inquiry, the shares that are bought back during the course of the year, how many of them are typically awarded to management in terms of bonuses?

John Albright -- President and Chief Executive Officer

I don't understand the question. Mark, do you?

Elizabeth Cohernour -- Wintergreen Advisers -- Analyst

If you were to buy back 100,000 shares in the course of the year. So over the last couple of years and this year, are about 50,000 or about -- isn't it about half of the shares that are bought back, that are awarded to management so that the total shares outstanding don't go down by very much?

Mark Patten -- Chief Financial Officer

Well, the way I'd say it is we bought back over -- nearly 530,000 shares in the last five years, and there were not nearly that many shares granted under the equity incentive program.

Elizabeth Cohernour -- Wintergreen Advisers -- Analyst

Approximately half?

Mark Patten -- Chief Financial Officer

I'm not sure I've got that number.

John Albright -- President and Chief Executive Officer

Happy to send it to you, Liz.

Elizabeth Cohernour -- Wintergreen Advisers -- Analyst

No. It's just as you, on a routine basis, announce how many shares you bought back, the number of outstanding shares don't go down by nearly as much. And it seems to be that that's because the shares are awarded in terms of bonuses, and then the bonuses are quite promptly sold by the recipient back to the company. So it seems to be a round robin of shares moving around, where the shareholders pay to buy them back, and then the shareholders pay to give them to the executive.

So I'm just curious as to how that works.

John Albright -- President and Chief Executive Officer

OK. Well, thank you for that insight.

Elizabeth Cohernour -- Wintergreen Advisers -- Analyst

OK.

John Albright -- President and Chief Executive Officer

Thanks, Liz.

Elizabeth Cohernour -- Wintergreen Advisers -- Analyst

Yup. That's all.

Operator

[Operator instructions] And our next question comes with Steve Olsen, private investor. Please go ahead.

Steve Olsen -- Private Investor

Good morning, John, Mark and Dan. I know you've been speaking about the recycling of the income-producing properties, but I was a little bit surprised at the speed and the size or the number of properties that you're planning on recycling, and that might be on my end. Using your low end of your sales proceeds, is it accurate to say that, from the company's cost basis, these properties are breakeven to a slight gain?

John Albright -- President and Chief Executive Officer

No. From where we purchased it, there's some healthy gains, in our opinion.

Steve Olsen -- Private Investor

Well, I added up to about $106 million being spent for the properties being sold at a range of $110 million to $125 million. Jacksonville was bought at $25 million. And maybe on your books, I'm not talking about a gap...

John Albright -- President and Chief Executive Officer

No, I know. You're talking about purchase price -- Steve, I could...

Steve Olsen -- Private Investor

Correct. And I mean, including the intangible -- the amount that's allocated to the in-place leases, you need to include that in your cost basis.

John Albright -- President and Chief Executive Officer

Well, OK. So two things. One is that of the range of $110 million to $125 million was purposefully conservative. Hopefully, that makes sense.

Two is that the intangibles, generally speaking, are going to generally wash out, the way that accounting works. So I think you're right. On a book basis, that's going to be relevant, but on a cash basis, it's really going to be fundamentally the property. So I guess, the way I'd think about it is that our objective was to demonstrate what it is we were trying to accomplish, and the range was intended to be prudent in terms of conservative.

Steve Olsen -- Private Investor

Why do you say the intangible leases wash out?

John Albright -- President and Chief Executive Officer

Because generally, the economics of a transaction aren't going to take into consideration the accounting for intangible assets or liabilities recognized with a lease, or otherwise, a commission or anything else. I mean, if you're thinking from a book basis, then you're right. But if you're thinking from -- but at the end of day, that's noncash, really.

Steve Olsen -- Private Investor

But wait, the full -- let's say, on Jacksonville, the $4 million or $5 million allocated to the lease is real cash of the company that now is being kind of amortized, so it's actually being lost and not considered as an expense when you determine your cash flow from that property. But I would argue that I want that $4 million back when you sell it. If you say that it's gone and you're going to compare it to the $20 million that you've allocated to land and building, I think that's improper.

John Albright -- President and Chief Executive Officer

I'd be happy to go through it with you offline. I'd just...

Steve Olsen -- Private Investor

But practically, you did pay $25 million for Jacksonville, correct?

John Albright -- President and Chief Executive Officer

Correct.

Steve Olsen -- Private Investor

OK. So I think, as owners of the company, we are going to compare the proceeds to the $25 million. You may have a GAAP basis of $17 million or $18 million, so you may show a gain on it.

John Albright -- President and Chief Executive Officer

Steve, we got it. [Garbled] $25 million. So let's wait and see kind of where that appears and we can have a chat.

Steve Olsen -- Private Investor

OK, yes. And I appreciate you disclosing the sale proceeds from your original cost basis and not highlighting the GAAP gain.

John Albright -- President and Chief Executive Officer

Right. Sure. Yes. Understood.

Steve Olsen -- Private Investor

OK. And then we can see whether or not these added value to the NAV or have been just neutral or negative to the growth of the NAV over the past few years.

John Albright -- President and Chief Executive Officer

Exactly. Totally agree.

Steve Olsen -- Private Investor

On the -- help me understand the Jacksonville properties. Those are referred to as a ground lease. So I imagine, the company a few years ago, bought, I think it was a 7-Eleven in Dallas, a very small investment. But there, I think you owned the building and the land.

Here, a ground lease, I always understand that to mean somebody else spent the dollars to build the building. Is that correct in Jacksonville?

John Albright -- President and Chief Executive Officer

Correct.

Steve Olsen -- Private Investor

So the building, obviously, will revert or will remain there on the land at the expiration of the lease. But did the tenants pay for the building?

John Albright -- President and Chief Executive Officer

The tenant. Yeah, the tenant spent the money to build the building and all the site work. And at the end of the lease, that -- the improvements revert to us.

Steve Olsen -- Private Investor

OK. Because just doing back of the envelope math, it's about $4 million being allocated to this 1-, 1 1/2-acre parcel of land, is that correct? Because you're not going to put the buildings on your book because you don't own that. Somebody else has that on their books and is earning a return on their, let's say, $2 million to $3 million that they spent on the building.

John Albright -- President and Chief Executive Officer

Correct.

Steve Olsen -- Private Investor

OK. I just -- OK. All right. Thank you.

John Albright -- President and Chief Executive Officer

Thanks, Steve.

Operator

And this concludes our question-and-answer session. I would like to turn the conference back over to John Albright for any closing remarks.

John Albright -- President and Chief Executive Officer

Thank you very much for attending the investor call. And if you have any follow-up questions, please don't hesitate. Thank you.

Operator

[Operator signoff

Duration: 25 minutes

Call Participants:

John Albright -- President and Chief Executive Officer

Mark Patten -- Chief Financial Officer

Craig Kucera -- B. Riley FBR -- Analyst

Elizabeth Cohernour -- Wintergreen Advisers -- Analyst

Steve Olsen -- Private Investor

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